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How small businesses build major muscle starting with their accounting

Posted by Melissa Hollis to Business Advice, Business

small businesses, big muscles

Not every organization is run by an accountant, and that goes double for startups and other small business ventures. Nonetheless, most business owners and visionaries quickly find that accounting and other back office tasks are an essential part of any infrastructure (even if that “structure” is housed in your basement or garage).

Businesses of all sizes stand their strongest when they have a solid handle on financial processes to keep all moving parts in order. Building this is also one of the things smaller businesses struggle with the most. As a lean machine, it is likely that you don’t have the resources to allocate to an in-house CFO or CPA so it is even more important you learn the best ways to leverage your administrative aspects in order to pump things up elsewhere within your company.

First off… What is accounting?

In a nutshell, accounting is how you identify, quantify and communicate your economic profile to all stakeholders involved in your business so they can make informed decisions about what is best for the business and its bottom line. Most organizations typically report this financial information on a monthly basis or at the very least, annually.

Maintaining your early stage financials is an essential part of strengthening small companies, from strapping young start-ups to toned-but-slim side businesses, and falling behind is not an option. Knowing these figures can be very helpful in the initial growth stages as there tend to be more make-or-break moments for business owners who typically wear a lot of hats.

By having a clear grasp of this at an earlier stage, you can set your business up for success as you continue to raise funds through the different life stages of the company.

It only gets harder to fix things later

Time is of the essence when it comes to establishing your finances. Cash flow is a big company problem and any issues can snowball over time if they go unanswered early on. Without insight to how you’re spending and exactly where you’re spending, it can be impossible to diagnose and solve problems as they grow in tandem with your business.

Mistakes big and small can become exponentially larger issues down the line. Without the right tools and resources in place you may unknowingly be cutting corners with typos, miscalculations and lapses in judgement which can mean big (EXPENSIVE) liabilities when they eventually surface - think taxes, audits, IRS, etc.

So how do you keep these scary situations from creeping up?

Knowledge is golden

Documenting all transactions, saving your receipts, categorizing and labeling your spending to create an insightful history is crucial to building a picture of your business. This can be a burden, as it is easy to forget about keeping track of your spending 100% of the time and complicated to filter what expenses are personal vs. business, but the earlier you put this system in place the happier you will be later on as your growth takes off!

Maybe even more important than saving your spending history is categorizing your spending habits. Labels are what make it simple and intuitive to analyze your purchases long after they’ve happened and relate them back to business objectives. Choose labels that make sense by type of purchase, department, labor, location, etc. to get the best picture of where your money is going while keeping in mind what expenses are recurring and can be anticipated month after month and year after year.

Good record keeping gives you an overall awareness of your business and helps you learn what it actually takes to keep each department running in an optimal fashion, which leads me to my next point...

Your finances are the key to your strategy

Review, revise, and repeat. By tracking and reporting on income and spending metrics you can plan budgets and purchases based on insights and trends, thus helping your business work smarter, not harder to achieve results. You can also identify areas of your business that are performing above and below your standards and pinpoint what needs to grow and what may need some rethinking.

This is why a good, insight-driven accounting software solution is important for getting a view of both the bigger picture and digging into the essential details. Being blind about spending is one of the biggest administrative mistakes any company can make, but for smaller, younger organizations it can be detrimental. Intelligent reports are your best friend and will help you keep your eye on the prize by categorizing what your purchases really mean in relation to your business needs.

Investors care about it

No matter how much passion they have for your product, service, or dream, any smart investor will still be concerned with your bottom line. By keeping a watchful eye on your finances and being able to explain your company performance, you’ll attract and impress prospective lenders that want to help grow your business.

Having issues with a particular section of your business? Don’t be afraid to make this clear to your investors, they’ll be thankful you can show you’re aware of these problems and looking to address and fix them. Some investors may also be interested in contributing not just financially, but by problem-solving from their history and experiences as well. Overall, your investors want to know where their money is going and that they’ve put it in knowledgeable hands.

Bankers care about it

Similar to investors, bankers want a slice of the action and are set up to provide the capital you need to build out newer parts of your business. However, unlike an investor, a bank cannot lend you money based on their passion for your dream. While they would love to assume the odds will be in their favor, bankers need to see you have a solid plan in place for how you spend your money, ultimately their investment.

This is simply because banks, credit unions, and other financial institutions are highly regulated and must adhere to very strict and specific guidelines when loaning money. As larger organizations, they face more potential liability and are unable to take bigger risks so they require proof that if they give you money you will be able to pay it back.

The only way to determine this trust is to dig into your financial profile. They will need you to be forthcoming with your accounting documents, i.e. balance sheets, profit and loss statement, etc. and will be most interested in your statement of cash flows so they can get a revealing picture of how you spend your money. All of this depends on you knowing where to look and how to report the right information back to them, otherwise they won’t take you seriously.

As you can see, from the start, businesses looking to grow have to be responsible, knowledgeable and accountable. By being conscious of your financial standings and needs you’ll be able to paint a picture of your company profile, identify where the opportunities are, build relationships with investors, bankers, and other stakeholders and prevent any major eruptions for the future of the company.

accounting terms

About the author
“Melissa

Melissa Hollis

Melissa Hollis is a content marketer and lover of all things West Coast. She enjoys waking up every day and getting the chance to rethink the obvious and enable the dreams of aspiring entrepreneurs.


Disclaimer: The inDinero blog provides general information about tax, accounting, and business-related topics. It is not intended to provide professional advice. Read more in our Terms of Use.